Testamentary capacity – James v James [2018] EWHC 43 (Ch) – lessons to learn…

Testamentary capacity – James v James [2018] EWHC 43 (Ch) – lessons to learn…


Guest post

With people living longer, often with deteriorating mental capabilities, it is perhaps unsurprising that more and more questions are being raised about a person’s capacity to make a decision that undoubtedly has huge ramifications for their family members.  A solicitor tasked with preparing a Will has the very important task of drafting a Will that meets the testator’s requirements at the same time as ensuring that they only act for a testator who has testamentary capacity.  Over the years, various Wills have been tested in Court where criticism has been levelled at the solicitor who prepared the Will for failing to properly assess and document the testator’s testamentary capacity.

The recent case of James v James [2018] EWHC 43 (Ch) is one such case.  Charles James built up a large farming and haulage business in Dorset.  In 2007, he gave some land to his daughter

r, Karen.  In 2009, he transferred some land and his business to his son, Sam.  He then made a Will in 2010 leaving his remaining land and the residue of his estate to his daughters, Karen and Serena, and his wife, Sandra.  Sam was not a beneficiary.  After Mr James passed away, Sam brought several claims against his father’s estate including a claim that he lacked testamentary capacity to execute a valid Will in 2010.  The focus of this article is the testamentary capacity claim and the comments that the judge made about the preparation of the Will.  It does not address the other claims.  The claim proceeded to trial and evidence was obtained from various lay witnesses who knew Mr James, the solicitor who prepared the Will, other professionals who had dealings with Mr James and two expert witnesses being specialist, old age psychiatrists.

The first decision that the judge had to make before deciding this claim was what the applicable test for testamentary capacity actually is.  Practitioners will be well used to the test laid down in Banks v Goodfellow (1870) LR 5 QB which is as follows:-

It is essential…that a testator shall understand the nature of his act and its effects; shall understand the extent of the property of which he is disposing; shall be able to comprehend and appreciate the claims to which he ought to give effect, and, with a view to the latter object, that no disorder of the mind shall poison his affections, avert his sense of right, or prevent the exercise of his natural faculties, that no insane delusion shall influence his Will in disposing of his property and bring about a disposal which, if his mind had been sound, would not have been made.”

The waters have been muddied by the introduction of the Mental Capacity Act 2005 (“MCA”) which sets out a new test of capacity that is different to the principles of Banks v Goodfellow.  The MCA specifically sets out the test that the Court of Protection must apply when it is considering whether a living testator does not have testamentary capacity so that a statutory Will can be made for him instead.  The question is whether that is the test to also be applied by judges assessing testamentary capacity retrospectively once the testator has died and the Will that the testator himself has prepared is the subject of challenge.

In the section of his judgment entitled “Law”, the judge referred to various cases where different judges have grappled with the question of what the appropriate test now is.  After considering the comments made by these various other judges and analysing the wording of the MCA itself, the judge decided that it is still the test set out in Banks v Goodfellow that has to be applied when assessing whether a testator who has now died had testamentary capacity when he executed his Will.  Comments were made, both by the judge in James and in other cases that the wording of the MCA was very specific and that if Parliament had wanted the MCA test to trump Banks v Goodfellow, it would have made this abundantly clear.   In summary, the current position appears to be that all solicitors must consider the provisions of the Mental Capacity Act when they take instructions of whatever nature from a client.  When taking Will instructions, private client solicitors should also carefully consider the various limbs of Banks v Goodfellow and satisfy themselves that the testator before them satisfies that test.

As is often the case when a claim is advanced that the testator lacked testamentary capacity, both the claimant and defendants instructed experts in old age psychiatry.  Of course, neither of these experts met Mr James whilst he was alive and so their opinions were based on his medical records and witness statements.  The experts agreed that he suffered from Alzheimers resulting in moderate dementia.  They agreed that he met some of the Banks v Goodfellow requirements but differed in their opinion as to whether he had the capacity to appreciate the claims of his children on his estate.  Whilst helpful therefore, it was clear that the determination was by no means clear cut.

The evidence of the solicitor who took instructions and prepared the Will was perhaps even more crucial in this instance where the expert conclusions were not dissimilar.  Her file, witness statements and oral evidence were closely examined by both the barrister for the claimant and the judge.  Whilst the challenge that was made to the validity of the Will was that Mr James lacked testamentary capacity, the judge noted that five conversations concerning the content of the Will were held with the testator’s wife as opposed to the testator directly.  Whilst conversations between family members about the content of a Will are not unusual, solicitors should take great care to check that the information being provided and instructions being given emanates from the testator himself.

The family broadly accepted that from 2004 onwards, Mr James‘ capabilities declined.  There were several instances of confusion and memory loss recorded in their statements and the medical records had mentions of dementia and Alzheimers, although there did not appear to be any formal diagnosis.  It was extremely unfortunate that the solicitor’s attendance notes and letter of engagement failed to record any consideration of the requirements of Banks v Goodfellow with the conclusion that Mr James met that test.   It was also extremely unfortunate that the solicitor did not take any steps to comply with the so called “Golden Rule”.   That rule of practice is that in the case of an elderly testator or one who has suffered a serious illness, a medical practitioner should either approve or witness the Will having satisfied himself of the capacity and understanding of the testator.  No steps were taken by the solicitor at all to obtain any medical evidence to support the Will.  The feeling is that it is much less likely that there will be a lengthy dispute on capacity post death if medical evidence was obtained at the time the Will came into being.  In James, the judge stated that it was “obviously regrettable that a medical opinion was not obtained”.

Ultimately, in James, the judge upheld the validity of the Will.  Once again, the evidence of the solicitor who was actually involved in the drafting of the Will was crucial and perhaps even pivotal.  The judge stated that he was “particularly struck by the evidence of Ms Thomas (which I accept)”.  She was an experienced private client solicitor well used to acting for farming families.  Her oral evidence at trial was that Mr James showed no signs of confusion or ill health.  She acknowledged that some of his behaviour was out of the ordinary but that she felt that he had the requisite capacity to execute a valid Will in 2010 and that there was no need for a medical opinion to be obtained to support that view.

A private client solicitor’s role is to continually assess a testator’s capacity.  They are entitled to form the view that the testator has capacity and that no further, supporting evidence is required but their reasoning behind that decision will be tested in Court if a claim is advanced.  A solicitor who has the comfort of a full file complete with detailed attendance notes of the meetings, file notes referencing a consideration of all of the limbs of Banks v Goodfellow and a supporting medical opinion is likely to feel much more confident in their assessment being upheld when giving their evidence than a solicitor who does not have the benefit of such a full file.

(Author: Emma-Louise Green – Associate, Meridian Private Client LLP)

How professional executors protect your interests

How professional executors protect your interests


Ruth Pyatt, of Birketts, explains why a testator may choose to appoint a professional to administer their estate – and the pitfalls of not having this expert assistance.

One of the most important decisions to make when writing a will is who to appoint as an executor. Recent press coverage about this has principally focused on the potential costs involved where a professional executor administers an estate.

However, given that a reported one in three wills written in England includes the appointment of a professional executor (either to act alongside a family member, or on their own), it is worth looking at why people writing wills (testators) are willing to accept the costs involved, even if this is going to have an impact on the legacies that they leave to their heirs.

Why do testators appoint professional executors?

To prevent additional stress

A common reason for appointing a professional executor is that the testator wishes to allow their family to grieve, rather than be burdened with the responsibility of administering the financial affairs of a deceased loved one.

Some of us are not natural organisers and don’t cope well in a crisis. It can be of great comfort for a testator, especially one who is already ill and has gauged that their families are going to struggle with loss, to be able to nominate a professional to relieve the family of what they predict will be an unwelcome burden at a stressful and emotional time.

Trusts

Where a trust is involved, a testator will often opt to have a professional executor (and trustee). There may be ongoing family trusts or trusts for minors or vulnerable beneficiaries (which can continue long after the remainder of the estate has been settled). Many trusts are simple and require little professional input, but where matters are more involved, a professional trustee in the form of a trust corporation can assist with longevity and continuity.

Complex affairs

Sometimes a testator will appoint a professional executor because they are accustomed to delegating their complex affairs and have lifelong (or career-long) relationships with their advisors. Complex affairs can mean cross-border matters (such as domicile or overseas assets), tax (whether it be the taxation of an individual or an individual’s interest in a business), or because of the need to ensure that a business will continue to operate after the death of a key member. Professional advisers can be best placed to act as executors in these circumstances.

Potential conflict

Whether an estate is complex or not, if a testator knows that there is likely to be conflict following their death, a professional executor can be appointed to act as an impartial or neutral party. They can make decisions objectively and at a necessary distance from emotional complications.

Families may have longstanding disputes, or a testator may be aware that a dispute is likely to arise on their death, whether in relation to 1975 Act claims, claims of lack of capacity, undue influence or because, for example, an executor has been directed to take an action under the terms of the will that is likely to prove unpopular.

If a testator’s affairs are less complex on the whole, but there is an area of complexity for which a testator has always sought advice, professional executors can be appointed to deal with these matters, with the remainder of the deceased’s affairs being left for the family to manage.

Typical examples of this restricted executor role involve executors appointed specifically to deal with digital assets, a literary estate, intellectual property and/or assets abroad. Testators can also appoint separate executors to take over, on their death, the administration of an estate for which they themselves are acting as an executor.

In a similar vein, if a testator is aware that their (non-professional) executors will need to appoint professionals to provide advice, their own choice of professional can be appointed. This can be an important motivator.

Why might a lay executor need to seek professional advice?

There are a variety of tasks involved in the administration of an estate that a non-professional (lay) executor may find difficult to carry out or may even overlook. Such tasks include:

  • opening and operating an executor’s bank account to hold estate funds during the administration of the estate
  • insuring unoccupied properties
  • arranging access to funds or obtaining bridging loans for the payment of inheritance tax payable before probate is obtained
  • advertising for creditors in The Gazette and in a newspaper local to the deceased
  • paying debts and estate expenses in the correct order
  • calculating and paying interest on unpaid legacies after 12 months of the death
  • carrying out bankruptcy searches against beneficiaries before payment is made

Carrying out these tasks is important, because executors can find themselves personally liable if they’ve not been addressed and things go wrong later.

Why might executors find themselves personally liable?

Executors might find themselves personally liable to parties in a range of circumstances.

Executors can find themselves personally liable to beneficiaries and creditors. Where an executor acts in some way that a loss is caused to the estate, this is known as a wasting of assets (in legal terms, a devastavit). This might occur if, for example:

  • a legacy is paid where there are insufficient funds to pay a debt
  • an executor delays pursuing a claim on behalf of an estate which is subsequently time-barred (or a limitation defence arises)
  • an executor pays funds to the wrong beneficiary, or distributes the estate within six months of the grant of probate, having not adequately made enquiries as to whether there is a likely claim under the 1975 Act
  • an executor encashes an investment that was gathering interest without good cause

In the case of these and other cases of maladministration and/or negligence, an executor can find that they are personally liable to make good the loss from their own funds.

Executors can also find themselves personally liable to third parties. Where penalties and interest for inheritance tax are payable to HM Revenue & Customs, these payments might not be recoverable from the estate. If sums are paid to a bankrupt beneficiary, the executor is personally liable (on behalf of the bankrupt person’s creditors) to the bankrupt’s trustee in bankruptcy for the funds made over. If the estate is distributed and then the Department for Work and Pensions request a repayment of the deceased’s pension credit or other means-tested benefit, an executor may have to make the repayment from their own funds.

According to annual statistics from the Royal Courts of Justice, claims against executors are on the rise, but it is not clear from figures how many of these claims are against professional executors and how many are against non-professionals.

What if the executor can’t pay?

For beneficiaries, creditors and third parties, there can be peace of mind where a solicitor is appointed as a professional executor, as solicitors have professional indemnity insurance to cover these sorts of claims occurring.

Although specialist executor insurance is available for lay executors to buy, it is unlikely to have the same level of cover, and because few non-professionals understand the level of responsibility and challenges of being an executor, the availability of such insurance is limited, and uptake is currently relatively low.

(Author: Ruth Pyatt)

“Create, Curate, Syndicate”

“Create, Curate, Syndicate”


This is my new my new mantra! Since working on the new SFE website, we have developed a whole library of original, relevant and informative content. The question is what more can we do with it?

Hence my new mantra “Create, Curate, Syndicate”

In other words, each new piece of content needs to be amplified. I was reading an interesting blog by Salvatore Trifilio, a content producer, who describes the creation of content as akin to building a bonfire. He states that “creating original high-quality content is the right place to start, but it’s only two-thirds of the battle. Content is the kindling you use to build your pyre and feed the fire. But, remember, your goal isn’t to build a campfire; you want to build a bonfire that can be seen for miles. And sometimes you need to throw a little fuel on the fire to really get a blaze going.”

So how do you do it?

Research carried out by Curata, suggests that a good mix is 65% creation, 25% curation and 10% syndication. However, each organisation needs to decide the best mix for itself.

First of all, we need to understand what each of the three elements are:

Creation – this is straightforward – the development of original, unique content

Curation – the gathering of high quality content on a single topic from other people, that is then re-organised and re-purposed probably put into a single article or post for the readership. The editor/content curator will normally highlight the golden nuggets for readers and add editorial and comment for readers. This is not plagiarism as full credit should be given to the original author. It is a way of showing though leadership and it augment the website as a source of knowledge. Content curation allows brands to share their thought leadership and become a greater knowledge resource for their site visitors. Furthermore, it can improve SEO (Search Engine Optimisation), as it allows for another section of your website to be indexed and provides more pathways to your own original content.

Syndication – this is the process of pushing your blogpost, article, video or any piece of web-based content out to other third-parties who will then republish it on their own sites. Clearly, this opens up your content to a new audience and you will get much wider reach. It also helps with SEO, particularly if your content is published on a site with much higher traffic than yours and some of that bigger site’s authority should be passed down to you.

So, in other words, you can take your original content and re-purpose it for new audiences and different formats. The ultimate goal would be to get visitors on the third-party site to visit yours and interact with you. Great syndicated content will increase your reach and has the power to generate new leads from perspective customers who may not have heard of you before.

So, here are six interesting things to do with your copy:

1 – change the title

Put it into a context that will make your new audience what to read it

2 – add an image

Research shows that curated content with an image generates 88% more clicks, particularly if you use text overlay (text on images) carefully

3 – Pull out quote

Highlight and pull out the most insightful quote from the article and make it stand out

4 – Add your own insight

In curated copy – add your own insights to the piece, showing your thought leadership

5 – Add social media sharing buttons

Make it easy for people to re-share your copy

6 – Add a call to action, if you can

Use the opportunity to turn a reader into a subscriber, but don’t insist they subscribe in order to read your content

So back to my mantra – “Create, Curate, Syndicate” – clearly original content is at the heart of everything we do at SFE. But we need to get clever about what we can do with it, how we re-purpose it for new audiences. As SFE clearly is a thought leader, we do have lots of material to work with, so getting it out there in new formats for different audiences, should be both challenging and fun.

(Author: Lakshmi Turner)

Making adjustments for clients living with dementia

Making adjustments for clients living with dementia


Most people can only process or think about 4-5 things at any one time, more than this causes “cognitive overload” and stress. This means we cannot think straight, concentrate, focus, retain information or make decisions. Without these abilities we cannot give valid instructions.

Clients who are living with dementia, or showing early signs of cognitive impairment, can make decisions and give instructions but professionals interacting with them should take steps to reduce distractions or cognitive overload. In this way we can comply with the requirements of Mental Capacity Act 2005 to make reasonable adjustments and support them in making decisions.

We can reduce environmental stress by making our offices more dementia friendly (or making home visits!). Avoid shiny floors, which look wet and slippery; remove large black door mats, which look like a deep hole and do not have striped carpets or lots of mirrors, which are visually confusing and even hallucinatory. Try and have clear signage, to avoid wandering and paint doors a different colour to walls to make them stand out.

We can improve our interaction with clients by clearly giving our name (wearing a badge helps) and stating our connection to them (my name is Iain, I am a solicitor and I believe you would like to talk about …). We should allow clients time to think; to find the right word, answer questions or even write down their thoughts. We may prompt and give reminders, but should not finish sentences or rush clients. Always ask clients how they would like to be helped.

Written communications can be vital to confirm our understanding of a client’s needs, but they need to be done carefully. We should deal with one issue at a time and only have one subject per sentence. We should be concise and use simple but adult language, and no jargon. Documents printed in black on white are difficult to read for someone with cognitive impairment, black on a yellow background has been found to be far easier to read and enclosing the most important information in a box helps tremendously.

Superfluous images and logos (no matter how expensive they were) are confusing and although we may have to include statutory information in our letters, it would be better to confine that to a covering letter on corporate letterhead and print advice in a simple enclosure or attachment.

Clients with any degree of cognitive impairment are vulnerable to financial abuse and advisers need to be alert to indicators of this. The warning signs include; notable differences between known finances and living conditions or personal appearance, efforts to isolate the client from their normal support network, the sudden appearance of a previously unknown individual in their life and new interest from a “carer” in proving capacity to change a will or lasting power of attorney, or to prove incapacity and have benefits paid to an appointee.

Full attendance notes are vital in this area of work, to defend the client’s instructions against future challenges and it may be necessary to involve the client’s medical practitioner in the process (the infamous “Golden Rule”).

Working with clients living with dementia is challenging, but very rewarding.

Iain Cameron

Iain Cameron

Principal of Acer Legal Solutions and a director of Acer Prime Law Limited

Iain Cameron is an accredited member of Solicitors for the Elderly with over 30 years’ experience in advising elderly clients. He is a Dementia Friends Champion for the Alzheimer’s Society. Having worked in private practice and as Legal Director of a major trust corporation he is now Principal of Acer Legal Solutions and a director of Acer Prime Law Limited.

Long-term care: who pays?

Long-term care: who pays?


Ruth Pyatt, of Birketts, explores social care costs and who pays for long-term care.  

On 7 December last year, the government announced that they had scrapped their plans to place a cap on what an individual would be required to spend on their own social care costs. The cap had originally been planned to be set at £72,000 for those over 65, and was due to come into effect in 2020.

A green paper setting out the government’s proposals for social care reform will be published by the summer of 2018, but it appears that the funding system that we currently have for social care and healthcare will be with us until at least 2020.

Under the current system, who pays for what, when it comes to long-term care?

This depends on:

  • The health, mobility and level of support required by the person in need of care, which determines whether the need is a healthcare or social care need.
  • What funding the person in receipt of care might be entitled to.
  • Where the need is a social care need, the value of the savings, assets and income of the person in need of care.

The first basic rule is that healthcare is funded by the NHS

If someone in need of care is assessed as having a disability or severe and complex medical needs that mean the individual has healthcare needs, rather than social care needs, they could qualify for NHS continuing healthcare (CHC). CHC is a non-means-tested, ongoing package of healthcare that is arranged and funded by the NHS and can be received at home, in a nursing home or in a hospice.

If the person in need of care doesn’t qualify for CHC, the NHS may still be responsible for some healthcare needs. The NHS is responsible for funding certain types of healthcare equipment and aftercare for people previously detained under certain sections of the Mental Health Act.

In addition, if someone is a resident of a care home that is registered to provide nursing care and they do not qualify for NHS CHC but have been assessed as needing care from a registered nurse, the NHS will make payment directly to the care home to fund care from registered nurses.

The second basic rule is that, in the first instance, social care is paid for by the individual needing care

Anyone can ask the local authority to carry out a care needs assessment. If the local authority decides that an individual needs support that it can provide, they have a legal duty to provide or arrange the services that the individual needs.

Although some local authorities will fund some services for the elderly (such as meals, transport, home modifications and equipment to help with the tasks of daily living) irrespective of an individual’s financial situation, most services are means-tested, and the local authority will carry out a financial assessment to determine who should meet the cost of social care.

Means-testing

In England, if an individual has capital in excess of £23,250 (including the value of any home), they will have to pay for their own care. (The thresholds for Northern Ireland are the same but are higher in Scotland; there is a more generous system in Wales.)

If an individual’s capital is below £14,250, they will be entitled to the maximum level of support, but they will still have to contribute all income in excess of £24.90, which can be retained for personal expenses.

If an individual has between £14,250 and £23,250, there will be some local authority funding available, but the individual will be expected to contribute all income in excess of the personal expenses allowance, and a capital tariff of £1 per week for every £250 or part thereof between the upper and lower limits.

Local authorities can’t generally assess joint resources of couples – they can only look at the individual’s capital and income. Jointly-owned assets are divided equally, with the exception of land and buildings, where the local authority will look at who has beneficial interest.

Notional capital and income

An important factor to note is that a local authority is permitted to take account of notional capital and notional income. Notional capital would include capital disposed of (which includes making a gift, including by executing a deed of variation), a transfer into trust, unusually high spending, gambling, and using savings to buy assets which are excluded from means-testing (such as jewellery, vehicles and investment bonds with life insurance) to avoid having to use it to pay for care (deliberate deprivation).

Notional income might be where the individual had a personal pension plan and was of qualifying age but had not purchased an annuity or arranged to draw down. If someone is assessed as having notional capital or notional income and they do not pay the contribution that the local authority expects the individual to make, the individual will end up owing the local authority money and the local authority has the power to pursue the debt.

In addition, if a third party has received capital in a transaction that is deemed to have deliberately deprived an individual of capital, the third party may be liable to pay the local authority the difference between what the individual would have been required to contribute at the time of their financial assessment and what they actually contributed towards the cost of their care.

Local authority funding

For those who do qualify for local authority funding, an individual may ask the local authority to arrange care services, receive direct payments from the local authority and arrange care for themselves, or ask someone else to manage the budget and organise care services on their behalf.

If the local authority is contributing to the cost of care, and the costs of the care services chosen to exceed the combined amount that the local authority is willing to provide, together with the capital and/or income that the individual is required to contribute, the local authority will allow a third party to top-up fees, as long as the third party is capable of doing so over the long term. However, an individual whose capital has fallen below the upper threshold (currently £23,250) can’t top up their fees from their own funds.

It should be noted that if an individual receives care in their own home, the value of the home is not included in the calculation of capital available to pay fees. If the individual needs to move in to residential care, the value of the home may be disregarded if the home is also lived in by a partner, child or a relative who is disabled or over the age of 60.

If the capital value of the home is included in the calculation of capital available to pay fees, then the local authority can assist with care costs for the first 12 weeks of care (known as the 12-week disregard) and may offer a deferred payment agreement (under which the local authority will put a legal charge on the property, so that they can reclaim what the individual owes in fees they have paid at a later stage, when the house is sold).

It’s sometimes possible to rent out the home while a deferred payment agreement is in place and use the rent towards the payment of care costs. If a deferred payment agreement is entered, the individual will be permitted to retain income above the personal expenses allowance (the disposable income allowance) to pay for additional costs of retaining the home. For some, equity release might offer an alternative to a deferred payment agreement.

(Author: Ruth Pyatt)

Promissory notes, personal representatives and probate

Promissory notes, personal representatives and probate


What happens when the deceased owed, or was owed, money? Ruth Pyatt explains.

A promissory note is, in its most basic form, a written statement containing an unconditional promise by one party to pay a definite sum of money to another party.

Often, a promissory note is used to set out the terms of a debtor/creditor relationship, and such documents are commonly drawn up, with or without legal assistance, when an individual borrows from a family member or friend.

According to the StepChange Debt Charity, 28 per cent of those seeking advice on managing debts owe more than £4,000 to family and friends.

A personal representative (an executor or administrator of a deceased person’s estate) often needs to take advice on the position of the estate, where the deceased has either been a debtor or creditor of a family member or friend and the debt, or part of it, remains outstanding as at the date of death.

If debtor/creditor relationships have been entered into, the initial difficulty can be proving the terms of the agreement between the parties. In the ideal situation, a personal representative can evidence the agreement by promissory note, or ‘I owe you’. How the personal representative should then proceed depends on whether the deceased was the debtor or creditor.

The deceased was owed money at the date of death (a creditor)

The debt is an asset of the estate and must be included for probate and inheritance tax (IHT) purposes.

The starting point for the personal representative is an assumption that the debt will be repaid in full. It is important to note that debts written-off during the lifetime (often on the deathbed) of the deceased will be regarded, for tax purposes, as a potentially exempt transfer (PET), or an immediately chargeable transfer at the time of writing off and may therefore still have to be included in the estate.

Also, in law and in equity, the release of a debt that is made voluntarily and without consideration must be made by a deed, otherwise it is void. If an IHT400 form is being completed, HMRC will require formal written evidence of the loan. Also required will be evidence of any loan that has been written-off. If the personal representative wishes to submit a figure for the loan, other than the full value of capital and interest outstanding at the date of death (because the personal representative believes that it is impossible, or not reasonably possible, for the debt to be repaid), they will need to give a full explanation.

Tax planning arrangements involving loans may also have to be accounted for, such as a loan trust, whereby money is lent, usually to a family member or trust, which then invests. In such schemes, the idea is that growth of the money loaned is outside the lender’s estate; but the original loan may or may not be repayable to the estate, depending on whether the loan had been in repayment during lifetime.

One other point that a personal representative should not overlook is that if the deceased was charging interest on the loan, this would have been additional income liable to tax and will have to be accounted for in any tax returns outstanding at the date of death.

The deceased was the debtor and had unpaid loans at the date of death

Debts owed by the deceased at the date of death are generally deductible for the purposes of IHT and for obtaining probate. If an IHT400 form is being completed, the personal representative will have to give copies of any written loan agreements and provide full details to show that the loan should be allowable as a deduction, such as the date of the loan, relationship of the creditor and the deceased, and details of how the deceased used the funds. However, particularly in the context of promissory notes, there are important and complex conditions concerning what the money the deceased borrowed was used for, and whether the debt is actually repaid from the estate.

‘Neither a borrower nor a lender be…’

These conditions on the deductibility of debts were mainly introduced by the Finance Act 2013 to combat ‘artificial’ debt arrangements and IHT avoidance schemes (which would include, in the simplest cases, an ‘I owe you’ for monies never actually received). This is an area in which personal representatives need to be particularly wary.

Except in very limited circumstances, if a personal representative is aware that a debt is not going to be repaid or is only partly to be repaid (for example, as in the case of the ‘I owe you’ for monies never received or, as another straightforward example, because the debt has been waived or partly waived), the debt (or only part of the debt) should not be included for IHT and probate purposes. Also, if such a debt is included as a deduction and not subsequently repaid, HMRC needs to be told.

What if the deceased had borrowed and then given the money away? It is possible to conceive of a situation where this might happen – parents who have limited liquid assets but wish to assist their children with, for example, a deposit for a house. In this case, the personal representative will have to account for a debt which is deductible and a PET (or immediately chargeable transfer if the gift was into trust), which may be subject to additional tax on death.

‘He that dies pays all debts…’

One further note is that a personal representative needs to be particularly aware of promissory notes in the case of insolvent estates. For example, while most ordinary unsecured debts rank equally, a debt to a spouse or civil partner is a deferred debt and should not be paid until all other debts have been paid in full.

(Author: Ruth Pyatt)